Days of Future Past: Nasdaq Leads Stocks Higher; S&P 500 Hits Record High

By Ben Levisohn

Is it possible to get too much of the X-Men? From the looks of the responses to the new flick, X-Men: Days of Future Past, the answer is probably not, at least not yet. Whether its at the box office, where the film is predicted to rake in some $120 million this weekend, or with the critics–Rotten Tomatoes has 92% of the ink stained wretches giving it a positive review–everyone seems to agree: X-Men: Days of Future Past delivers the goods. In fact, I was hard pressed to find a critic who panned the film, which unites the original X-Men cast with the one from X-Men: First Class, with Wolverine sent back in time to the 1970s to avert an apocalyptic future.

Will investors be hoping for the chance to do the same thing one day? Right now, that might seem to be hard to imagine. The S&P 500, after all, gained 1.2% to 1,900.53 this week, a new record high and the first close above 1,900 in the history of the index. The Dow Jones Industrial Average, meanwhile, rose 0.7% to 16,606.27, just 109 points, or 0.7% away from a new high of its own. Even better, the Nasdaq Composite surged ahead by 2.3% to 4,185.81, retaking the leadership it had forfeited in March, while the small-company Russell 2000 gained 2.1% to 1,126.19, regaining its 200-day moving average.

The Dow Jones Industrials got a boost from UnitedHealth Group (UNH), which gained 2.8% to $78.77 this week, its highest close in more than one month. UnitedHealth announced this week that it would join the Illinois health exchange.

The biggest movers in the S&P 500 were also the biggest movers in the Nasdaq 100 this week. Netflix (NFLX) climbed 15% to $402.35 this week, its biggest weekly gain in four months. Netflix announced that it would launch its streaming-movie service in six European countries, including France and Germany.

Trip Advisor (TRIP), meanwhile, jumped 15% to $94.42, its biggest weekly gain since July 2013. Trip Advisor purchasedlafourchette this week, while Italy said it was investigating the travel booking site to see if it too appropriate steps to keep fake opinions off the website.

As you can probably tell by those gains, investors were feeling a lot better about risky stocks this week. Still, they liked their the 10-year Treasury bonds too, even if yields ticked up 0.018% percentage points this week to 2.536%, perhaps a sign that they’re buying into the notion that the Federal Reserve means it when it says it will keep interest rates lower for longer. Schwab’s Liz Ann Sonders and team warn investors not to be caught up in the rush for yield:

With the economy improving and some signs of inflation picking up we would traditionally expect yields to move higher—and we still believe that will ultimately occur. At this point, we don’t believe the bond market is signaling a serious economic problem. There are several reasons beyond just recent weak growth for lower yields, including: demographics, waning Treasury issuance thanks to the dramatic improvement in the budget deficit, central bank policies around the world, deflationary impulses from Europe, China, and Japan, and geopolitical risks. There is clearly a global search for yield as we’ve seen high yield bonds also rise in price; while demand for sovereign debt, even in some of the countries that were recently on the precipice of default, has resulted in record low yields around the globe. We urge investors to be especially mindful of the risk associated with the search for yield. Low yields can be frustrating, but capital losses due to taking on more risk than appropriate can cause real damage to financial plans.

Ned Davis Research’s Ned Davis, meanwhile, reminds investors that not only is the S&P 500–it’s trading at a price-to-sales ratio of 1.66, above the 1.26 times that separated expensive from fair value– but that expensive markets have a way of underperforming over long periods of time. He explains:

Dan Sullivan, the respected “chartist” says, “We learned a long time ago that over-valued markets can and often do become even more overvalued. Some of our best gains have come over periods in which majority opinion has felt the market was overvalued.” I have to agree that valuations, even at extreme levels, don’t tell one very much about the short-term outlook. But I do think they can tell us a lot when looking out, say, five years…

…there have been 52 quarters of “high valuations” since 1954, and five years after these 52 quarters, the market was higher 22 times and lower 30 times with a median loss of -2.5%. Compare that to the 75 quarters that the market has been undervalued since 1954. Of the 75 readings, 74 of them saw the S&P 500 higher five years later, with a median gain of 65%.

Just a reminder, then, as the market continues to grind its way higher: Not even super investors have the ability to go back in time.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.